Friday, April 17, 2015

Karl Marx and the “labor theory of value”

One of the central tenets of Marxism is the "labor theory of value," which is the idea that the economic value of something is determined by the number of hours it took to make it. Karl Marx introduces this theory early in his work, in the very first section of the very first chapter of "Das Kapital" (his longest book):

Karl Marx

Quote from Marx about "labor theory of value"

"A use value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialised in it. How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labour, contained in the article. The quantity of labour, however, is measured by its duration, and labour time in its turn finds it standard in weeks, days, and hours." (Source: Karl Marx's "Das Kapital," Chapter 1, Section 1, as translated into English at Marxists.org)

Marx and Engels

Even Marx presented some qualifications to his theory ...

There are several problems with this theory, and much has been written describing the many flaws of using it to describe value. I will not touch on all of these problems, but only on one of them - the one that I find most interesting. It can be demonstrated with a qualification that Marx himself made to this theory. Even Karl Marx, the greatest proponent of the labor theory of value, qualified his theory with the idea that only those labor hours that were "socially necessary" should be counted as adding value. Marx's concept of "social necessity" is not very well-defined, but his definition's meaning is clear enough to show that it contradicts his labor theory of value, attacking its very basis as an explanation.

Iron and Coal, painting from 1855-1860 (during Marx's lifetime) about the Industrial Revolution

I will now turn to his words to show this:

... such as how all labor must be "socially necessary"

"Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogenous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogenous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary." (Source: Karl Marx's "Das Kapital," Chapter 1, Section 1, as translated into English at Marxists.org)

Power-loom weaving, 1835 (during Marx's lifetime)

But what labor is "socially necessary," and what does this concept even mean? Marx attempts to answer these questions in this way:

What is "socially necessary"?

"The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time. The introduction of power-looms into England probably reduced by one-half the labour required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labour represented after the change only half an hour's social labour, and consequently fell to one-half its former value." (Source: Karl Marx's "Das Kapital," Chapter 1, Section 1, as translated into English at Marxists.org)

Time wasted in idleness or incompetence doesn't add value, Marx would admit ...

In other words, any time wasted by the laborer in idleness or incompetence doesn't count as adding value, and is not "socially necessary." This leads Marx to the conclusion here:

This argument admits that the bottom line of what gets produced is relevant in measuring value, and that value is not just determined by the amount of time spent producing something, as he claimed earlier.

Marx is conceding the importance of supply and demand here, even if he doesn't know it ...

So if what gets produced is relevant, he is taking into account the demand of consumers as a relevant factor; because consumers care more about what is produced, than how long it took to produce it. And if demand of consumers is relevant, then one confronts the problem of how to meet it efficiently; and it would thus seem prudent to reward people for meeting that demand with an actual supply. Thus, Marx's whole theory of "social necessity" is really just a roundabout and imprecise way of describing supply and demand - which contradicts his labor theory of value, which he said was based upon labor hours expended (rather than consumer demand). Thus, even Karl Marx could see the need to meet consumer demand with an actual supply, and see the flaws in his labor theory of value as a way of meeting this demand. His attempts to qualify that theory with the phrase "socially necessary" end up contradicting the entire basis of this theory, showing it as the flawed nonsense that it is.

Karl Marx

Marx's qualification amounts to an admission of his theory's serious flaws

Despite its imprecise definition, Marx's theory of "social necessity" happens accidentally upon the true source of economic value, which is the interaction of supply and demand in determining market prices. The true economic value of something, as measured by free markets, is the market equilibrium price - or the price at which supply equals demand. I will not go into that theory here, as I describe it in one of my other posts; but suffice it to say here that it is an accurate description of the way free markets value these things. It shows the maximum price that consumers are willing to pay to get a good, and the minimum price that producers are willing to accept to produce or sell it. Quite by accident, Marx has happened upon the true theory of economic value. He contradicts it throughout his work with a dogmatic devotion to the labor theory of value, but his admission early on - within paragraphs of his introducing the labor theory to begin with - shows that even he recognizes that the theory is flawed.

Karl Marx

Conclusion: The "labor theory of value" is nonsense

So if even Karl Marx recognizes that the labor theory of value is flawed, that doesn't say much for the theory's usefulness in explaining anything substantive. The theory - quite simply - is utter nonsense, and should be abandoned at first opportunity.

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About me

By training, I am a business major with a concentration in marketing, and a certificate in economics. I originally wanted to do market research for businesses because I enjoyed the social science aspects of marketing, and I have studied psychology a little on my own; but I now wonder if this will ever be my field. I have also taken a fair amount of communications classes, because I thought about grad school in advertising or public relations (or even business & economic journalism), but I'm not sure if I will ever do these things. (I'm glad I studied them just the same, though.)

By inclination, I learn about a lot of other things in my spare time. For example, I am a history buff, an aspiring polyglot, an amateur linguist, a political philosopher (after a fashion), and a student of the Bible. Most of the things I study on my own these days have something to do with one of these subjects (or sometimes even more than one), and I write about many of them on my blog. So my actual profession is ... you guessed it ... a math tutor! Not what you'd expect, right? (Not what I would have expected, either ... )

I have no regular schedule for posting, but I usually publish a blog post about once a week.